A Very Rare Find

I’ve been writing for a while now about the low level of investor sentiment and what it means for the general investor. This week I want you to see exactly what I see. It could change your life.

The American Association of Individual Investors (AAII) conducts a weekly survey of their membership (about 150,000 people), asking if they think the market will be higher or lower in six months. Now it pains me to say it, but this group of individual investors could not be more wrong when it comes to how they feel about the market. They have demonstrated considerable aptitude over the past 29 years for being most bullish at market tops, and most bearish at market bottoms – a troubling “buy high, sell low” pattern emerges from their survey results. But ultimately, that’s a good thing for us because it can be interpreted as a contrarian indicator.

Today, on average only 25% of AAII members are feeling bullish about the market, a historically low reading. So I decided to go back through history and find out what happened after other such instances of low sentiment. Since there were so few times they’ve been this down on the market, I recorded what happened to the S&P 500 after only 28% of members on average were bullish (28% is still in the historically low range). I collected the results in the table below. Here you can find the average US market return for the time period following an instance of low investor sentiment. Let’s keep in mind that like anything, although this has worked well in the past, there is no certainty it will continue to work.

If there was ever a reason to put down the newspaper, ignore the pessimistic headlines, and simply focus on the data, here it is. You don’t get a lot of 25% bullish readings in a lifetime. This is one of them. 

Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc offering investment management and planning for high net worth Canadians. Ben focuses on the Growth and Income Portfolios and reducing tax.